Effects of Tax on Commercial Banks Profitability in Uganda: A Case Study of Stanbic, Centenary and DFCU Bank

Abstract

This study is established the effect of tax changes on commercial bank’s profitability, taking a case study of two banks in Uganda. It focused on ascertaining the trend of the commercial bank’s profitability for a period between 2007 to 2018, established the effect of taxes (excise duty, withholding taxes and corporate taxes), operational costs and lastly examined the effect of forex assets to liabilities on the profitability of the commercial banks in Uganda for the period 2007 to 2018. Declines in profitability were observed between 2007 to 2010 attributed to mostly by low financial inclusion. The poor financial performance was majorly contributed by higher taxes, Non-Performing Loans and low financial inclusion by customers. Results also revealed that as taxes increased, profitability decreased. In other words, tax levies appeared to be inversely related to the profits made by the commercial banks,( rho =-0.7203, Pr =.0082). Higher operating costs cut down the profits earned by the commercial banks. The higher the forex assets over forex liabilities, the higher the profitability of the commercial banks. Bank of Uganda has for several years reduced their bank rate (CBR) in a bid to attract commercial banks to borrow from them in order to allow citizen access credit at lower costs which is necessary for investment, financial inclusion and development. This has not been the case in Uganda as the banks still charge higher interest rates despite the efforts by bank of Uganda. Therefore, Commercial banks should reduce on the lending rate and find out ways to minimize their operational costs such as sink costs, overhead costs and so on.